IRS is allowed to retain fraudulent tax payments made before bankruptcy
OPINION ANALYSIS
on Mar 31, 2025
at 4:43 pm
(Katie Barlow)
United States v. Miller presents the kind of simple facts that populate law-school hypotheticals. A business is experiencing financial difficulties. The shareholders (who own the business) use its funds to pay their personal debts, such as taxes owed to federal government. When the business files bankruptcy, creditors complain that the shareholders shouldn’t have used the money of the business to pay their personal tax liabilities. Can the Internal Revenue Service retain the money? The Supreme Court ruled last week that yes, the Internal Revenue Service can keep the money. The first is Section 544 which creates a federal cause-of-action allowing the bankruptcy court to recover money paid out prior to bankruptcy if the transfer is “voidable under applicable laws.” The second is Section 106 which waives federal sovereign immunity in a number of specific sections of the Bankruptcy Code including Section 544.
For Jackson the key to this case is that under Utah law, (the applicable fraudulent conveyance law), the creditors of a failed business would not be able to recover from the IRS She concludes that the transfer to the IRS does not fall under the definition of “voidable” for the purposes of Section 544. Jackson explains that the text of Section 106, “read as a whole, makes clear that it … does not establish any substantive rights against the Government.” All that Section 106 does is “give courts jurisdiction to hear
claims against the government.” It does not change “the substantive requirements of the claim itself.”[Section 544]Working from those premises, Jackson easily can reject the effort to “transform
from a jurisdiction-creating provision into a liability-creating provision.” Jackson goes on to point out that her reading does not render useless the inclusion of Section 544 in the listed sections for which sovereign immunity is waived, because it would still allow creditors to invalidate improperly perfected tax liens under Section 544(a). Given the strong tradition of a narrow reading of waivers of sovereign immunity, the bankrupt cannot prevail.[Section 106]Context is everything here. Congress included a sovereign immunity waiver in the Bankruptcy Code of 1978. As I have written elsewhere, despite the fact that the Supreme Court has upheld sovereign immunity claims by federal and state governments in several cases, it concluded that the statutory waiver is not specific enough. In 1994, Congress added to Section 106 a listing of all the sections of the Bankruptcy Code which grant an important power to recover funds from third-parties. If Congress wants to hold the federal government liable, it must try harder than in the past. The third time around will tell if it will work.
